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Daily Newsletter, Thursday, 09/11/2003

HAVING TROUBLE PRINTING?

The Option Investor Newsletter Thursday 09-11-2003
Copyright 2003, All rights reserved. 1 of 3
Redistribution in any form strictly prohibited.
In Section One:
Wrap: Relief Bounce?
Futures Markets: Treasuries sell, equities bounce, gold drifts
Index Trader Wrap: See Note
Market Sentiment: Investors Remember
Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP (view in courier font for table alignment)
************************************************************
09-11-2003 High Low Volume Advance/Decline
DJIA 9459.76 + 39.30 9502.84 9410.42 1.61 bln 1963/1233
NASDAQ 1846.09 + 22.30 1852.60 1819.42 1.76 bln 2022/1159
S&P 100 511.37 + 2.60 513.88 508.77 Totals 3985/2392
S&P 500 1016.42 + 5.50 1020.88 1010.92
W5000 9853.11 + 58.70 9887.56 9794.44
RUS 2000 507.43 + 5.67 507.90 501.76
DJ TRANS 2735.07 + 29.80 2743.49 2703.62
VIX 20.50 - 0.76 21.46 20.24
VXN 32.97 - 0.19 34.46 32.32
Total Volume 3,661M
Total UpVol 2,738M
Total DnVol 840M
52wk Highs 331
52wk Lows 27
TRIN 0.80
NAZTRIN 0.50
PUT/CALL 0.89
************************************************************
Relief Bounce?
After two days of declines the markets rallied after each
memorial service and as the clock ticked down on the possibility
of another terrorist attack. As it became apparent there had
been no terrorist event the markets began to creep upward from
the morning dip. They ignored negative economic news and low
volume to retest 9500 and 1850 once again. Fear of darkness
took hold at 3:PM and the indexes began giving up their gains.
Dow Chart
Nasdaq Chart
The morning started out badly with the Jobless Claims coming
in well over 400,000 as we expected. The official consensus
estimate was for a drop to 395,000 but the headline number
rose to 422,000 instead. Last weeks number was revised up to
419,000. If you have been reading my articles you know I was
expecting something in the 425K range for this week and I was
not far off. Not only are more workers being laid off but the
number of continuing claims rose +61,000 to 3.67 million. This
was the largest number since July 12th. The four-week moving
average rose to 407,250 and the highest level since July-26th.
29 states reported rising claims. The Jobless Claims were very
negative to the bullish case but after the initial drop in the
S&P futures to 1009 on the news at 8:30 they rebounded to
almost 1016 before the open.
Helping confuse the issue was a +0.2% rise in Import Prices.
This was less than expected at +0.3% but when taken in context
of a +3.9% increase in energy prices it left most investors
scratching their heads. The lack of a major change in the
headline number would indicate the trend to lack of inflation
is still intact despite the higher energy prices. Should the
energy prices suddenly drop the number could quickly go
negative.
The Trade Deficit increased once again to -$40.3 billion in
July and $11.3 billion was to China. This ever increasing
black hole is about to find a bottom if the current China
legislation passes. The war over the devaluation of their
currency will have some serious fallout. Companies that
design products in the U.S. and then manufacture them in
China could see a huge jump in their import tariffs. One
version has a +27.5% tax on all imports from China in order
to level the playing field. Currently China's currency is
kept at artificial levels to give it a competitive advantage
in the marketplace. They have refused to let it float and
one U.S. threat is to remove their favored nation trade
status and associated benefits. Tom Clancy, the author of
many fiction novels about China and its economic attacks
on the U.S. has got to be jumping up and down saying I told
you so. Of course most of his books end up with a shooting
conflict where the U.S. wins and I do not see that in the
immediate future.
Traders also shook off a downgrade on IBM by Salomon Smith
Barney at the open. SSB said the stock price had gotten ahead
of fundamentals and that the CSFB assessment was wrong. CSFB
had upgraded IBM saying that it would benefit from a late
year turnaround in IT spending. SSB said that investor
sentiment had gotten ahead of revenue growth and lagging
services bookings would hurt IBM. SSB said bookings might be
strong in the 3Q but down for the entire year. They recommended
clients take profits in IBM now. IBM shook off the opening
drop to $86.40 and finished slightly positive at $87.90.
The banking index rebounded from yesterday's drop with a jump
back to 870.51 intraday but dropped at the close to 864.69.
It was still positive for the day but the oversold bounce
was weak. The pressure from yesterday came from multiple
warnings of falling loan demand from businesses as well as
a sudden drop in mortgages due to the rise in rates. Key Bank,
National City and Washington Mutual all warned that demand
was slipping and conditions were worsening. The rebound was
likely bargain hunting but the volume was weak.
Thursday was a throw away day in my opinion. The drops for
the last two days were due as much to worries about a potential
terrorist event as much as profit taking from the big gains.
The constant break away to memorial events and the numerous
sound bites for politicians and reporters kept the volume on
the exchanges to a minimum. The price action was based on
small buy/sell programs pushing the indexes from one range
to the next with no defining trend. The volume ended with
the lowest full day of trading since Aug-28th and about -16%
below Wednesday.
This light volume relief bounce of +22 points on the Nasdaq
after a drop of -50 points (-2.6%) on heavy volume from
Wednesday was far from conclusive. If anything it was an
oversold bounce and brought us back to neutral for Friday.
We are approaching the middle of September, the most volatile
month of the year for the markets and we are moving into the
most active weeks of this warning cycle. The valuation dogs
are lose and the IBM downgrade this morning should be followed
by other analysts wanting to get their 15 min of fame. We get
earnings from Oracle at the open on Friday and while nobody
expects them to miss estimates it will be interesting to see
how they spin their guidance. Larry Ellison is tied with
John Chambers for his ability to spin the news to Oracles
benefit. The majority of analysts expect ORCL to announce
inline at 8 cents on revenue of $2.14 billion. The dissenters
think ORCL will make their earnings on cost cutting instead
of revenue increases above the expectations. The real answer
is sure to impact tech stocks tomorrow. Announcing inline
has not been a winning strategy lately.
The bond market absorbed another huge inflow of government
paper this week with bid-to-cover ratios still high despite
the continuing uncertainty. With a few earnings warnings
beginning to appear on the fringes and the continuing drop
in employment the bond junkies are feeling better about
holding inventory.
The Dow rebounded from yesterday's test of 9400 to test the
high from yesterday at 9500. That test failed with a drop
that split the difference with a 9457 close. One trader
said it was a patriotic bid under the market more than
anything else. I believe it was traders coming back into
the market after taking profits on Wednesday to avoid any
attack risk. Much of the volume for the day came in the
last 30 min of trading. Futures volume rose significantly
on both sides of the market. I have received numerous
emails from readers who feel serious distribution is in
progress and the chance for a major up move from here are
becoming weaker every day. I received numerous other emails
pointing out the bullishness of the limited drop and instant
reversal when considering the distance we have come and the
calendar. Unfortunately I agree with both. It is bullish
that the markets are holding up as well as they are at these
levels. I watch the volume flow through the Eminis on Wed
and at the close today and I was impressed at the number
of buyers. This is definitely not a normal rally or a normal
September market.
Friday may not give us a real clue to direction either. We
have several economic reports at the open in addition to the
ORCL earnings. We have the PPI and Retail Sales at 8:30 and
Michigan Sentiment at 9:45. I do not expect a big move from
these events. I would think traders would watch them from
the corner of their eye but they are focusing on the Fed
meeting next Tuesday. With Bernanke and Ferguson being
renominated to the board they are probably hoping Ben will
be carrying a bigger stick into the meeting in an effort to
fight that deflation monster with another rate cut. Do not
hold your breath. There is a possibility with the nonfarm
payrolls down -93,000 and Jobless claims well over 400K
for the last two weeks but that chance is still very slim.
According to the Fed funds futures the next change is expected
to be a 25 point hike in April 2004. While the Fed may want
to head off the deflation monster they have clearly shown
they do not want to move until they have to. Cutting another
25 points now would endanger billions of dollars currently
held in money markets. With MM yields already only pennies
above zero any further cuts could make it unprofitable for
funds to continue to offer any return to holders. We could
see a massive shutdown of money market funds and that cash
withdrawn for other purposes. Shucks, some of it might even
find its way into the stock market. (Are you listening Ben?)
Maybe the Fed still has one more ace up their sleeve that
nobody is counting on but that ace cannot be played without
exacting a terrible price on the investment community. I
doubt Greenspan will allow it without a strong reason. Either
way traders will be either holding their breath until Tuesday
afternoon or buying the hope for that surprise cut.
The anniversary is over and the terror alert was never raised.
The fear of another event is slowly dwindling but somewhere
in the U.S. there are people alive today that will eventually
die in the next attack. Next week, next month or next year,
eventually there will be another attack. It will probably
come when we least expect it. We need to use every anniversary
of the WTC attack to motivate us to go the extra mile to
prevent them from being so massive. Just today there
was an article about a canister of 15 pounds of highly
radioactive depleted uranium being smuggled into Los Angeles
by ABC reporters for the second straight year while doing an
investigative piece on lax border security. Despite the
obvious radioactivity and the ease at which it could have
been detected it arrived at its destination right on schedule.
The package was designed to emit radiation in a form and
strength of a more dangerous device. It was shipped from
Jakarta, a terrorist hotspot, in a shipping container all
the way to the final destination in Los Angeles. If a
radioactive device, active or otherwise, can be shipped
without discovery then how simple would it be to ship C4 or
some germ warfare component right through the security screen.
There are an estimated 10,000 containers offloaded in the U.S.
each day and only a very small fraction are searched. Our
borders are porous and cannot be fixed. 65,000 people gather
together at more than a dozen locations each weekend for
football games and offer prime targets. 25% of the weight
on scheduled passenger planes is unscreened commercial
shipments. If an idiot can ship himself home for the holiday
in a shipping crate without being found then what else is
shipped each day that could be dangerous. We may be a harder
target than we were two years ago but for anybody with a
death wish the security will never be enough. Our best
defense is a strong offense and the refusal to let these
people impact our daily lives. I leave you with the battle
cry from the passengers on the fourth plane who refused to
see their plane used as a weapon. Let's roll.
Enter Very Passively, Exit Very Aggressively!
Jim Brown
Editor
***************
FUTURES MARKETS
***************
Treasuries sell, equities bounce, gold drifts
Jonathan Levinson
It was a mercifully uneventful 9/11, with a relatively orderly
day in the markets. Equities corrected part of yesterday's
losses, treasuries pulled back and gold traded both sides of
unchanged.
Daily Pivots (generated with a pivot algorithm and unverified):
15 minute chart of the US Dollar Index
The US Dollar Index rose off its overnight lows and cleared
96.60, bringing down gold and the metals indices. The CRB also
slipped, dropping .51 to 244.87.
Daily chart of December gold
December gold was sold aggressively from the open, bottoming at
10AM from a low of 375.80. It regained the 380 level at noon and
held it for the remainder of the session, advancing to positive
as of this writing, up .10 at 381.20. The move revived the bear
wedge that goldbugs were cheerfully forgetting after its upside
violation earlier this week, with the day low coinciding within
the lower rising trendline. The oscillators are in overbought
territory and continue to signal the risk of a correction,
possibly to the 347 support as a bear wedge target despite the
numerous support levels on the way down. 385 remains the high of
this move and short term resistance. The HUI and XAU both traded
negative for most of the session but closed positive, HUI +1.83
to 202.21 and XAU +.91 to 94.31. Silver broke to a new 3 year,
trading as high as 5.368 on the December contract. It is not a
bearish chart.
Daily chart of December Silver
Daily chart of the ten year note yield
The 13B ten year treasury auction generated a better-than-
expected bid-to-cover ratio of 2.23 and yielded 4.34%. The ten
year note yield rose 6.5 basis points on the day to close at
4.334%, rising within what appears to be a potential bullish
descending wedge toward horizontal support above 4.2%. This
level will be critical, as the horizontal support could
constitute the potential neckline of a bearish head and shoulders
formation. The oscillators remain decisively down in the
meantime, and today's countertrend rise in the yield did nothing
to change that.
Daily NQ candles
We have rolled over to the December '03 (3Z) futures contracts,
and Prophet's data is sparse, which accounts for the more
"elegant" daily candle charts. Nevertheless, the picture is
substantially the same as that for the Septembers profiled last
night, with today's corrective bounce printing a "return to the
scene of the crime" to the broken lower rising trendline on the
bear wedge. The sell signals on the daily chart oscillators
actually progressed further on the move, giving us a bearish
divergence. While the sell signals here are very preliminary,
they were overdue and appear to be developing normally.
30 minute 20 day chart of the NQ
The bear wedge breakdown on the 30 minute NQ chart bounced from
the 61.8% Fibonacci support off the Tuesday high. I copied the
upper rising trendline and pasted it at the bottom of the wedge,
to create a flag, and as you can see, the bounce point coincides
perfectly. This is a bear flag, still projecting lower, but we
await the completion of the ongoing oscillator upphases on this
timeframe before expecting meaningful downside. The end of
session weakness might or might not be the end of the upphase in
this timeframe. As oscillators are lagging indicators, it will
take more pullback before they confirm the start of a new
downphase. For the moment, it has yet to occur.
Daily ES candles
The daily ES looks just the daily NQ, except not as bearish, with
the sell signals still not actually printed on the daily chart
oscillators. Insofar as the NQ led the rally to the upside, one
might guess that it will lead to the down, but time will have to
tell. The bounce today failed at 1019.75, again right at the
lower ascending bear wedge trendline. The 955 wedge target
remains in play, but bears have a number of support levels to
negotiate on the way down, the first being the 1008 level that
supported yesterday's and today's declines.
20 day 30 minute chart of the ES
The failure at 1020 matches up with Fibonacci resistance, and cut
short the possible bull wedge breakout off this morning's lows.
The "line cloning" resulted in the same bear flag as we see on
the 30 minute NQ above, but the upper channel resistance seems
very far away, particularly with the stochastic approaching the
resistance line that capped the last rise. The Macd appears to
be hesitating early in its up-phase. There's plenty of life left
in the upphases on this timeframe, but the topping daily chart
oscillators could keep a lid on it. The ES remains more bullish
than the NQ here.
Daily YM candles
The YM resembles the ES most closely, also testing and failing at
the broken lower wedge support line. The 30 minute chart
oscillators (below) gave a preliminary sell signal on the 300
minute stochastic.
20 day 30 minute chart of the YM
Today was a relatively insignificant session, which is wonderful
news to report. The bounce in equities anticipated by the deeply
oversold intraday oscillators started at the open and did not go
far enough to disturb yesterday's outlook. Today's bounce
hesitated at the end of the day, but is not decisively over and
could continue tomorrow. Gold remains uncertain, and I'm looking
forward to tomorrow for more clues as to whether the bear wedge
deserves more respect. See you at the bell!
------------------------------------------------------------
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****************
MARKET SENTIMENT
****************
Investors Remember
- J. Brown
Call it a patriotic rally, call it a short-term bounce from two
days of losses. Call it whatever you want but investor sentiment
was not focused on stock and bond prices today. Instead the mood
was one of remembrance. Many Americans paused to look back to
that fateful day two years ago. The world isn't the same place
it was on September 11, 2001. Hopefully, history will prove that
it is a safer place today.
Those investors who did have one eye on the markets will notice
that the bounce was rather widespread. Nearly every sector was
higher save for a few energy-related stocks. Market volume was
light given the anniversary but market breadth was bullish.
We continue to urge caution for traders. The major indices may
have bounced but there was some weakness right towards the close
and we could see more profit taking ahead of the weekend.
-----------------------------------------------------------------
Market Averages
DJIA ($INDU)
52-week High: 9609
52-week Low : 7197
Current : 9459
Moving Averages:
(Simple)
10-dma: 9494
50-dma: 9269
200-dma: 8649
S&P 500 ($SPX)
52-week High: 1032
52-week Low : 768
Current : 1016
Moving Averages:
(Simple)
10-dma: 1019
50-dma: 996
200-dma: 925
Nasdaq-100 ($NDX)
52-week High: 1387
52-week Low : 795
Current : 1350
Moving Averages:
(Simple)
10-dma: 1357
50-dma: 1286
200-dma: 1128
-----------------------------------------------------------------
Still no earth-shattering changes.
CBOE Market Volatility Index (VIX) = 20.50 -0.76
Nasdaq Volatility Index (VXN) = 32.97 -0.19
-----------------------------------------------------------------
Put/Call Ratio Call Volume Put Volume
Total 0.89 519,399 463,420
Equity Only 0.75 400,195 299,558
OEX 0.96 25,285 24,498
QQQ 5.33 15,065 80,309
-----------------------------------------------------------------
Bullish Percent Data
Current Change Status
NYSE 72.6 + 0 Bull Confirmed
NASDAQ-100 78.0 - 2 Bear Correction
Dow Indust. 83.3 - 3 Bull Confirmed
S&P 500 81.2 + 0 Bull Confirmed
S&P 100 88.0 - 1 Bull Confirmed
Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart. Readings above 70 are considered overbought, and readings
below 30 are considered oversold.
Bull Confirmed - Aggressively long
Bull Alert - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert - Take defensive action if long
Bear Confirmed - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend
-----------------------------------------------------------------
5-Day Arms Index 1.33
10-Day Arms Index 1.07
21-Day Arms Index 1.01
55-Day Arms Index 1.05
Extreme readings above 1.5 are bullish, and readings below .85
are bearish. These signals don't occur often and tend be early,
but when they do, they can signal significant market turning
points.
-----------------------------------------------------------------
Market Internals
-NYSE- -NASDAQ-
Advancers 1856 2001
Decliners 975 1057
New Highs 81 122
New Lows 11 7
Up Volume 1112M 1363M
Down Vol. 451M 346M
Total Vol. 1600M 1736M
M = millions
-----------------------------------------------------------------
Commitments Of Traders Report: 09/02/03
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.
Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.
S&P 500
More of the same for commercial traders in the large S&P
futures contracts, but we do see a slight bump in short
positions. There is barely any change between longs
and shorts for the small traders.
Commercials Long Short Net % Of OI
08/12/03 399,414 456,767 (57,353) (6.7%)
08/19/03 404,665 455,381 (50,716) (5.9%)
08/26/03 410,378 472,987 (62,609) (7.1%)
09/02/03 417,973 482,392 (64,419) (7.2%)
Most bearish reading of the year: (111,956) - 3/06/02
Most bullish reading of the year: 18,486 - 6/17/03
Small Traders Long Short Net % of OI
08/12/03 158,821 71,040 87,781 38.2%
08/19/03 162,034 87,064 74,970 30.1%
08/26/03 170,424 76,967 93,457 37.8%
09/02/03 169,030 75,748 93,282 38.1%
Most bearish reading of the year: (1,657)- 5/27/03
Most bullish reading of the year: 114,510 - 3/26/02
E-MINI S&P 500
The bullish trend of growing long positions for the
commercials in the e-minis has continued. The latest
report shows drop of 10K short positions and 9K new
long positions. Locksteppening in the opposite direction
are the small traders with a big jump in short positions
to the most bearish we've seen them in a long time.
Commercials Long Short Net % Of OI
08/12/03 306,014 217,233 88,781 17.0%
08/19/03 296,971 235,779 61,192 11.5%
08/26/03 338,766 234,841 103,925 18.1%
09/02/03 347,724 224,011 123,713 21.6%
Most bearish reading of the year: (354,835) - 06/17/03
Most bullish reading of the year: 123,713 - 09/02/03
Small Traders Long Short Net % of OI
08/12/03 62,534 106,403 (43,869) (26.0%)
08/19/03 90,428 125,980 (35,552) (16.4%)
08/26/03 52,131 120,853 (68,722) (39.3%)
09/02/03 56,709 134,094 (77,385) (40.6%)
Most bearish reading of the year: (77,385) - 09/02/03
Most bullish reading of the year: 449,310 - 06/10/03
NASDAQ-100
Commercials caught part of the stampede fever and added
some long positions to their NDX futures. Meanwhile
small traders rotated some money out of longs and into
shorts but no big change.
Commercials Long Short Net % of OI
08/12/03 34,374 53,015 (18,641) (21.3%)
08/19/03 32,107 53,665 (21,558) (25.1%)
08/26/03 33,991 55,849 (21,858) (24.3%)
09/02/03 37,002 55,379 (18,377) (19.9%)
Most bearish reading of the year: (21,858) - 08/26/03
Most bullish reading of the year: 9,068 - 06/11/02
Small Traders Long Short Net % of OI
08/12/03 23,957 7,871 16,086 50.5%
08/19/03 25,607 10,134 15,473 43.3%
08/26/03 26,108 8,864 17,244 49.3%
09/02/03 23,168 10,561 12,607 37.4%
Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year: 19,088 - 01/21/02
DOW JONES INDUSTRIAL
No serious changes among the commercial traders while
small traders have grown fur and drastically reduced their
bullish positions. The spike in shorts have them looking
for a INDU drop.
Commercials Long Short Net % of OI
08/12/03 24,942 9,878 15,064 43.3%
08/19/03 21,088 18,984 2,104 5.3%
08/26/03 24,586 10,386 14,200 40.6%
09/02/03 25,462 10,447 15,015 41.8%
Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year: 15,135 - 10/16/01
Small Traders Long Short Net % of OI
08/12/03 6,933 13,248 (6,315) (31.3%)
08/19/03 15,717 9,143 6,574 26.4%
08/26/03 14,115 5,592 8,523 43.2%
09/02/03 6,629 13,402 (6,773) (33.8%)
Most bearish reading of the year: (8,777) - 10/12/01
Most bullish reading of the year: 8,523 - 8/26/03
-----------------------------------------------------------------
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The Option Investor Newsletter Thursday 09-11-2003
Copyright 2003, All rights reserved. 2 of 3
Redistribution in any form strictly prohibited.
In Section Two:
Dropped Calls: None
Dropped Puts: ANPI, ESRX
Call Play Updates: AU, ERTS, GILD, GS, PGR, UTX
New Calls Plays: LUV
Put Play Updates: EBAY, KKD, KSS
New Put Plays: None
****************
PICKS WE DROPPED
****************
When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.
CALLS:
*****
None
PUTS:
*****
Angiotech Pharma - ANPI - cls: 41.57 chg: +2.88 stop: 41.01
Gosh darn it! We knew there was headline risk with this bearish
play and expected any bullishness to come from an FDA approval
for BSX's stent here in the U.S. We were not expecting any
headlines that Canada had approved the Taxus stent by Boston
Scientific. It was this news that sent shares of ANPI soaring up
7.4% today. There is still risk for the bulls as a federal judge
has not ruled yet on JNJ's request against BSX but it doesn't
matter now for us. We've been stopped out at $41.01.
Picked on September 8 at $37.69
Change since picked: + 3.88
Earnings Date 08/12/03 (confirmed)
Average Daily Volume: 538 thousand
Chart =
---
Express Scripts - ESRX - close: 61.08 change: +1.43 stop: 61.00
Keeping the pattern of inexplicable price behavior intact, our
ESRX play did the unthinkable over the past couple days. The
break below the 200-dma looked like the final straw that would
send the stock down towards our $54 profit target. But no. The
bulls bought that breakdown, and the stock is up sharply over the
past two sessions, triggering our $61 stop near the end of the
day. The play worked out quite nicely after the rollover up at
$65, but unfortunately we gave a fair amount of those paper gains
back on the rebound. Hopefully you took our advice from Tuesday
and locked in some gains near the $58 level. Clearly, with our
stop violated and price rebounding smartly, there's no incentive
to bend the rules and keep ESRX on the playlist. The downtrend
has played itself out and it is time to go.
Picked on August 24th at $63.48
Change since picked: -2.40
Earnings Date 10/22/03 (unconfirmed)
Average Daily Volume = 1.41 mln
Chart =
------------------------------------------------------------
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PLAY UPDATES - CALLS
********************
Anglogold Ltd. - AU - close: 39.98 change: +0.97 stop: 37.50
Following the lead of the rest of the market, gold stocks dropped
at the open on Thursday, but the dip didn't last long. Our AU
play dropped all the way to $38.23, and the rebound from that
successful test of support (old resistance) provided a solid
entry point for those that chose to take it. The initial rebound
led to some rather dull consolidation throughout the afternoon
before the stock shot higher to close at its high for the day,
just below $40. AU has now filled in the gaps from Tuesday and
last Friday and now looks poised to once again work its way
higher. Traders that missed the dip entry on Thursday will want
to target either another dip and rebound from above the $38.50
level or a breakout over $40. Those with a more conservative
approach may want to wait for a breakout over Tuesday's intraday
high ($40.75) before playing.
Picked on September 2nd at $39.51
Change since picked: +0.47
Earnings Date 10/30/03 (unconfirmed)
Average Daily Volume = 841 K
Chart =
---
Electronic Arts - ERTS - close: 89.92 chg: +0.08 stop: 85.99
Shares of ERTS continue to trade in a narrow range hovering near
the $90 mark. Just as ERTS failed to participate in the steep
profit taking the previous two sessions it did not participate in
the rally today. First Albany did initiate coverage on the stock
with a "buy" but investors failed to take notice. The rising
trend is still intact and the sideways consolidation has brought
ERTS near its bottom border of the ascending channel. The bounce
off the $88.25 level looks like a decent entry point but many
traders may want to wait for a move back over the $91 mark, where
shares of stopped short the last few sessions. Conservative
traders can also consider upping their stop under the $88 level.
We will leave our stop at $85.99.
Picked on August 28 at $89.06
Change since picked: +0.86
Earnings Date 07/23/03 (confirmed)
Average Daily Volume: 3.3 million
Chart =
---
Gilead Sciences - GILD - cls: 66.84 chg: +0.71 stop: 64.75*new*
Biotech fans can breathe a sigh of relief. The BTK, which has
been a big winner the last several sessions, bounced from its
simple 10-dma today. The biotech index looks ready to make
another charge at the 490 level just overhead. Meanwhile, the
steep profit taking that hit tech stocks on Wednesday also hit
GILD but the short-term rising channel from mid-August is holding
up. The stock also turned in a meager bounce off the $66 level
today. Our short-term target is still the $70 mark. Nimble
traders who can make a $3.00 move worth their while might want to
take advantage of today's bounce. We are upping our stop to
$64.75.
Picked on August 19 at $65.32
Change since picked: +1.52
Earnings Date 07/31/03 (confirmed)
Average Daily Volume: 3.31 million
Chart =
---
Goldman Sachs Grp. - GS - close: 89.84 change: +0.40 stop: 88.00
Breaking more than a week of consolidation between the $90-92
price levels on Wednesday, GS' apparent breakdown certainly
didn't look good, especially with the daily Stochastics in full
bearish roll and the XBD index closing back under the $585 level.
But Thursday's session proved that the bulls in this sector
aren't done buying the dips by a long shot. The initial dip
below $89 was eagerly bought, but with light volume the rule on
the 9/11 anniversary, there just wasn't enough lift to keep GS
above the key $90 level. As we've noted recently, dips to the
20-dma ($88.81) look like favorable entry points, and apparently
we aren't the only ones that have made that observation. Note
how GS rebounded from $81.84 this morning, just 3-cents above
that moving average. The ascending trendline from the March lows
has now risen to just above $88, and that should help to protect
our stop, so long as the bullish trend in the XBD index remains
intact. Conservative traders that want to wait for renewed
strength before entering will need to see a breakout over $92.25,
just above last week's intraday high.
Picked on September 2nd at $90.45
Change since picked: -0.61
Earnings Date 9/24/03 (unconfirmed)
Average Daily Volume = 3.79 mln
Chart =
---
Progressive Corp. - PGR - close: 72.83 change: -0.49 stop: 71.25
That $74 resistance level is really turning out to be a bugger of
an obstacle for our PGR play, as it has consistently turned the
stock back every day this week. We expected to see some solid
resistance near that level, but we're ready to see the rally
resume now. The problem is that the daily Stochastics have now
turned down and it may be that we're in for a serious test of
support at the 10-dma ($72.37) first. While a rebound from above
$72 still looks like a viable entry point, the intraday pattern
is looking a bit toppy. So the better entry strategy for a push
up to our $75-76 target might be to wait for a conclusive
breakout over $74 first. For now, we'll maintain our stop at
$71.25.
Picked on August 27th at $70.74
Change since picked: +2.09
Earnings Date 10/15/03 (unconfirmed)
Average Daily Volume = 785 K
Chart =
---
United Technologies - UTX - cls: 78.29 chg: +0.47 stop: 77.20
There has been a lot of news from Dow component UTX in the last
two days. The company raised its dividend by 30 percent from 27-
cents to 35 cents a share. The cash dividend is payable on Dec.
10th for shareholders on record as of Nov. 14th. Yesterday also
brought news that UTX was awarded another $23 million order in
defense contracts for its Pratt and Whitney division. More
importantly, UTX's Chairman George David reaffirmed the company's
2003 outlook in their mid-quarter update today. David said
earnings should come in between $4.55 and $4.80 for 2003.
Analyst consensus estimates are for $4.65. Shares didn't react
that well to the news. Investors have been choosing to sell
stocks that only reaffirm or meet current expectations believing
the improvements are already priced in the stock. There were
some positive comments made by Wall Street analysts about the
cyclical/industrial sectors and George David himself was very
upbeat about 2004. Unfortunately he didn't see any improvement
yet in their current business. We are VERY cautious on UTX right
now. Shares have failed to really bounce from the $78 level and
the last several days have been building a series of lower highs.
We would not recommend new positions and current traders should
reaffirm their stops.
Picked on August 29 at $80.05
Change since picked: -1.76
Earnings Date 07/17/03 (confirmed)
Average Daily Volume: 2.1 million
Chart =
**************
NEW CALL PLAYS
**************
Southwest Airlines - LUV - close: 18.36 change: +0.36 stop: 17.00
Company Description:
Southwest Airlines is a domestic airline in the United States
that provides predominantly short-haul, high-frequency, point-to-
point, low-fare service. As of the end of 2002, LUV operated 375
Boeing 737 aircraft and provided service to 59 airports in 58
cities in 30 states throughout the country. The company focuses
principally on point-to-point, rather than hub-and-spoke, service
in markets with frequent, conveniently timed flights and low
fares.
Why we like it:
Helping to propel the Dow Transports ($TRAN) to new highs for the
year last week was the bullish action in the Airline index
(XAL.X), which also soared to new 52-week highs. Not all of the
Airline stocks are looking healthy, but those with a solid
business and a healthy balance sheet are benefiting from the
sector and market strength. After bottoming near $12 last March,
shares of LUV have been steadily advancing, posting a continuous
series of higher highs and higher lows. Today's breakout to
fresh 16-month highs on above-average volume places the stock
right in the middle of some significant historical resistance in
the $18-20 area, but we like the way LUV has been able to push
through other seemingly strong levels of resistance in recent
months. This solid price performance is really no great surprise
either, as the company continues to deliver on both the revenue
and earnings fronts, rather than losing money hand over fist like
so many other carriers.
The stock's PnF chart is looking strong, as it is on a Buy
signal, in a column of X's, above the bearish resistance line and
working with a bullish price target of $23.50. Setting a target
that high may be a bit on the optimistic side, but a continued
rise to the $20 level looks like a good initial target. If the
bulls can clear that level of resistance, then odds look good for
a continued rally to the $22 level to test the 2002 highs. LUV
is a slow moving stock, and with price currently above the upper
Bollinger band, it may be tough to advance higher without at
least a mild consolidation. We'll look to game new entries on a
pullback and rebound from the $17.50-18.00 area, with broken
resistance now likely to provide strong support. This area
should be further supported by the rising 20-dma ($17.34) and
then the 50-dma ($17.13), which is just above our $17.00 stop.
Note that the ascending trendline from the March lows rests at
$17.05, and that should keep our stop well protected. Due to the
slow-moving nature of LUV, we're recommending using either the
October or December contracts.
Suggested Options:
Shorter Term: The September 17 Call will offer short-term traders
the best return on an immediate move, as it is currently in the
money. But with September options expiring next week, and LUV's
slow-moving nature, our preference would be for the October 17
strike.
Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the December 20 Call. This
option is currently out of the money, but should provide
sufficient time for the stock to move higher without time decay
becoming a dominant factor over the short run. More conservative
long-term traders will want to use the December 17 Call.
BUY CALL SEP-17 LUV-IW OI=6678 at $0.95 SL=0.50
BUY CALL OCT-17 UVM-IT OI=1559 at $1.40 SL=0.75
BUY CALL DEC-17 LUV-LW OI=3118 at $1.80 SL=0.90
BUY CALL DEC-20 LUV-LD OI=1475 at $0.50 SL=0.25
Annotated Chart of LUV:
Picked on September 11th at $18.36
Change since picked: +0.00
Earnings Date 10/20/03 (unconfirmed)
Average Daily Volume = 2.45 mln
Chart =
------------------------------------------------------------
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PLAY UPDATES - PUTS
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eBay, Inc. - EBAY - close: 51.70 change: +0.29 stop: 54.25
If you wondered why we set a trigger on our bearish EBAY play,
the rebound over the past couple days should remove any doubt.
The bulls have clearly not given up on this leading Internet
stock and are staunchly attempting to defend that $50 support
level. We are sticking with our trigger, as that way we'll have
confirmation of weakness and a PnF Sell signal working in our
favor before entering the fray. Of course, aggressive traders
are welcome to try shorting a failure of the current rebound, so
long as they understand the additional risk that comes with such
a strategy. For now, we're content to be flat, awaiting the
breakdown that will trigger the play to live status. Entries on
the initial breakdown should work, but those with a more
conservative approach may want to wait for a subsequent rebound
near $50-51, confirming that that broken support is then acting
as resistance.
Picked on September 9th at $50.87
Change since picked: +0.83
Earnings Date 10/16/03 (unconfirmed)
Average Daily Volume = 13.1 mln
Chart =
---
Krispy Kreme Doughnut - KKD - cls: 42.08 chg: +0.70 stop:44.01
Talk about your win-win scenarios. KKD and Wal-Mart (WMT) have
agreed to let KKD test five stores inside Wal-Mart stores. Not
only will WMT shoppers now have the temptation of shopping with
glazed donut in one hand and a coffee in the other but KKD has a
built in market of customers. Tastes like good news for both
companies. Meanwhile the weakness in KKD has stalled above the
$40 mark and shares have actually bounced the last two sessions.
The move back above $42 is probably irritating for the bears but
the stock remains below its simple 10-dma. Traders still looking
for new entries might want to consider a failed rally under
$43.00. FYI: KKD's point-and-figure chart remains in a bearish
sell signal.
Picked on September 8 at $41.69
Change since picked: + 0.39
Earnings Date 08/21/03 (confirmed)
Average Daily Volume: 1.0 million
Chart =
---
Kohl's Corp - KSS - close: 59.30 change: +0.20 stop: 62.25
It was a quiet session for shares of Kohl's Corp. The stock
traded in less than a $1 range today. The bad news for the bears
is that support at the simple 50-dma is holding. The bad news
for the bulls is that resistance at $60.00 is also holding.
Looking at the intraday chart one can see how KSS popped up on
the open but couldn't remain above the $60 mark. The RLX retail
index also produced a very small bounce above its own 50-dma but
the intraday chart for the RLX suggest we could see more weakness
soon. We would suggest that traders interested in playing KSS
wait for a move below the $59.00 level.
Picked on September 9 at $59.35
Change since picked: - 0.05
Earnings Date 08/14/03 (confirmed)
Average Daily Volume: 2.9 million
Chart =
*************
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*************
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The Option Investor Newsletter Thursday 09-11-2003
Copyright 2003, All rights reserved. 3 of 3
Redistribution in any form strictly prohibited.
In Section Three:
Play of the Day: CALL - LUV
Traders Corner: Is The ITM Strangle Better Than An ATM Machine?
**********************
PLAY OF THE DAY - CALL
**********************
Southwest Airlines - LUV - close: 18.36 change: +0.36 stop: 17.00
Company Description:
Southwest Airlines is a domestic airline in the United States
that provides predominantly short-haul, high-frequency, point-to-
point, low-fare service. As of the end of 2002, LUV operated 375
Boeing 737 aircraft and provided service to 59 airports in 58
cities in 30 states throughout the country. The company focuses
principally on point-to-point, rather than hub-and-spoke, service
in markets with frequent, conveniently timed flights and low
fares.
Why we like it:
Helping to propel the Dow Transports ($TRAN) to new highs for the
year last week was the bullish action in the Airline index
(XAL.X), which also soared to new 52-week highs. Not all of the
Airline stocks are looking healthy, but those with a solid
business and a healthy balance sheet are benefiting from the
sector and market strength. After bottoming near $12 last March,
shares of LUV have been steadily advancing, posting a continuous
series of higher highs and higher lows. Today's breakout to
fresh 16-month highs on above-average volume places the stock
right in the middle of some significant historical resistance in
the $18-20 area, but we like the way LUV has been able to push
through other seemingly strong levels of resistance in recent
months. This solid price performance is really no great surprise
either, as the company continues to deliver on both the revenue
and earnings fronts, rather than losing money hand over fist like
so many other carriers.
The stock's PnF chart is looking strong, as it is on a Buy
signal, in a column of X's, above the bearish resistance line and
working with a bullish price target of $23.50. Setting a target
that high may be a bit on the optimistic side, but a continued
rise to the $20 level looks like a good initial target. If the
bulls can clear that level of resistance, then odds look good for
a continued rally to the $22 level to test the 2002 highs. LUV
is a slow moving stock, and with price currently above the upper
Bollinger band, it may be tough to advance higher without at
least a mild consolidation. We'll look to game new entries on a
pullback and rebound from the $17.50-18.00 area, with broken
resistance now likely to provide strong support. This area
should be further supported by the rising 20-dma ($17.34) and
then the 50-dma ($17.13), which is just above our $17.00 stop.
Note that the ascending trendline from the March lows rests at
$17.05, and that should keep our stop well protected. Due to the
slow-moving nature of LUV, we're recommending using either the
October or December contracts.
Suggested Options:
Shorter Term: The September 17 Call will offer short-term traders
the best return on an immediate move, as it is currently in the
money. But with September options expiring next week, and LUV's
slow-moving nature, our preference would be for the October 17
strike.
Longer Term: Aggressive traders looking to capitalize on an
extended rally will want to look to the December 20 Call. This
option is currently out of the money, but should provide
sufficient time for the stock to move higher without time decay
becoming a dominant factor over the short run. More conservative
long-term traders will want to use the December 17 Call.
BUY CALL SEP-17 LUV-IW OI=6678 at $0.95 SL=0.50
BUY CALL OCT-17 UVM-IT OI=1559 at $1.40 SL=0.75
BUY CALL DEC-17 LUV-LW OI=3118 at $1.80 SL=0.90
BUY CALL DEC-20 LUV-LD OI=1475 at $0.50 SL=0.25
Annotated Chart of LUV:
Picked on September 11th at $18.36
Change since picked: +0.00
Earnings Date 10/20/03 (unconfirmed)
Average Daily Volume = 2.45 mln
Chart =
------------------------------------------------------------
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TRADERS CORNER
**************
Is The ITM Strangle Better Than An ATM Machine?
By Mike Parnos, Investing With Attitude
OK, CPTI students, are you ready to rock and roll out? Recently,
I've spent some time tweaking a strategy we discussed in this
space last year – the ITM (in-the-money) Strangle. Hopefully,
I've improved it. It makes sense. Now we'll see if it will make
dollars, too.
____________________________________________________________
The QQQ ITM Strangle or "Rock 'n Roll Out"
We're going to base this example on current prices. Today, the
QQQs finished at $33.64. Basically, we're going to buy some QQQ
2005 in-the-money LEAPS put and call options and then sell near
term near or at-the-money options against the long LEAPS
positions. It sounds simple. It ain't brain surgery, but it will
require some focus and understanding.
The Position – Part One
Buy 10 QQQ Jan. 05 $38 puts @ $6.50 = $6,500
Buy 10 QQQ Jan 05 $28 calls @ $7.90 = $7,900
Total out of pocket = $14,400
Sounds like a lot of money, but only $4.40 ($4,400) is really at
risk. There are 10 points of intrinsic value in this position.
Wherever the QQQs trade, the very least the position can be worth
is $10. That leaves the rest as time value – for the 16 months
until expiration in 2005.
The Position – Part Two
I bet you're wondering where the profit is coming from. With the
QQQs at $33.64 let's:
Sell 10 QQQ October $33 calls @ $1.55= $1,550
Sell 10 QQQ October $33 puts @ $.95 = $950
Total premium credit = $2,500
Now, don't get too excited. You probably won't be able to keep
the entire $2,500. We sold the $33 puts and calls and the
likelihood of the QQQs finishing at $33 is pretty remote. The
likelihood is pretty darn good, however, that the QQQs will stay
within our $28-$38 range of the long 2005 LEAPS. As we near
October expiration, we're going to have to roll our position out
to November. The time value will have eroded away, and, during
the last week (Wednesday – Friday), we should be able to close out
the short positions and roll them out to the next month – with the
same, or new, strikes – depending where the QQQs are trading.
How Do You Choose The Near Term Strikes?
This QQQ strategy works best in a stagnant market – one that
remains in a tight trading range. That's not what the market is
currently doing. It's making big moves – and we anticipate that
may continue for the near future. Some people are predicting a
10-15% correction while others are hitching their wagons to a star
and hoping to get a free ride to the moon.
The near term strikes to sell are a matter of personal preference.
We could have sold the $32 puts and $35 calls and taken in a total
of $1.20 ($1,200). Then, if the QQQs finished between $32 and
$35, both short options would expire worthless.
The problem with establishing a range with the short options is
that we're limiting the amount we can make to $1,200. Why do
that? If we sell near or at-the-money options, we'll take in the
larger amount ($2.50), but we will certainly have to roll out to
November. Whatever we spend on buying back the short options in
expiration week, we'll get back – plus a chunk more time value for
the November cycle.
I Know You're Confused
Whenever there are rolling out issues, there are always a lot of
questions. We'll explore a number of "what if" scenarios in
Sunday's column. Maybe print out this column for reference so
you'll have it as we continue the discussion Sunday. Get your
questions ready.
In the past, this strategy has worked well – generating an average
of 8% a month on the initial investment in the long LEAPS
positions. The QQQs will stay stagnant for a while, and
sometimes make dramatic moves like they did over the past few
months. Sometimes, adjustments of the long LEAPS may be
necessary. There are some basic guidelines, but there is a lot of
flexibility and your decisions can be made on your personal view
of the market and your interpretation of the charts.
Between now and Sunday, take a look at the QQQ option chain and
tink about what we've discussed above. This can be fun and
profitable.
_________________________________________________________________
SEPTEMBER POSITIONS – Remember that September is a FIVE- WEEK
option cycle. Expiration is Friday, September 19th.
September Position #1 – SPX Iron Condor – SPX @ 1016.42
S & P 500 Index = SPX
We sold 10 contracts of SPX 1040 Sept. calls and bought 10
contracts of SPX 1050 Sept. calls for a net credit. Then we sold
10 contracts of the SPX 950 Sept. puts and bought 10 contracts of
the SPX Sept. 940 puts. Our net credit was $2.70 (a total credit
of $2,700). We have a huge maximum profit range of 950 to 1040.
More aggressive investors may have narrowed the range a bit and
taken in more money. At 1016.42, the SPX has moved up. We still
have a bit of a cushion and it's time for a pullback, so we'll
keep the faith – at least for now.
Position Activity!
September Position #2 – COF Sell Straddle – COF @ $ 58.24
Capitol One Financial = COF
We sold 10 contracts of COF Sept. $50 calls @ $2.35 and also sold
10 contracts of COT Sept. $50 puts @ $2.50 for a total credit of
$4.85 ($4,850). We will make some profit if COF finishes anywhere
between $45.15 and $54.85. The closer COF finishes to $50, the
more money we'll make. Our bailout points were the parameters of
our profit range. Maximum potential profit is, again, $4,850.
A lot can happen in five weeks of exposure to market movement –
and did. On Sept. 2, COF continued its uptrend through our
bailout point of $54.85. When COF hit out exit point, we bought
back the short September $50 calls for $5.40 ($5,400). Since we
had taken in premium of $4,850, we incurred a loss of only $550.
This is a necessary money management move to make sure we live to
trade another day. It was seemingly a good move because COF
finished Thursday @ $58.24 – far beyond our upside parameter.
September Position #3 – HPQ (Hewlett Packard) Bear Put Spread –
HPQ at $20.18.
HPQ is weak and may return to the $15 range. So, we bought 10
contracts of the HPQ Feb. 2004 $20 puts @ $2.25 and we sold 10
contracts of the HPQ Feb. 2004 $15 puts @ $.40. Total debit of
$1.85. Potential max profit of $3.15. In reality, if HWP makes
the move down, it will probably happen on the coattails of a
market move down. It shouldn't take until February. I'd gladly
accept a profit of $800-900 and close the position early if the
opportunity presented itself. This is a long-term position.
September Position #4 – OEX – Bearish Calendar Spread – OEX @
$511.37
Maybe it's time for the market to return to reality. Let's see if
we can take advantage of this with a calendar spread. We bought 8
contracts of OEX November 470 puts @ $10.60 and sold 8 contracts
of OEX September 470 puts @ $2.20 for a total debit of $8.40. As
the market retreats, we will sell near term puts against the
November long 470 puts to further lower our cost basis. This
position may take a few months to come to fruition. It's a
directional bet, but with a limited risk as we get paid while we
wait.
Shoulda Been Out, But Ain’t . . .
There are some CPTI readers who entered the EBAY position iron
condor position with a range of $95 to $110 (or a split adjusted
$47.50 to $55). EBAY has steadily moved back down and is now
$51.70, comfortably within the maximum profit range.
___________________________________________________________
New To The CPTI?
Are you a new Couch Potato Trading Institute student? Do you have
questions about our educational plays or our strategies? Feel
free to email me your questions. An excellent source for new
students is the OptionInvestor archives where we've been
discussing strategies and answering questions since last July. To
find past CPTI (Mike Parnos) articles, look under "Education" on
the OI home page and click on "Traders Corner." They're waiting
for you 24/7.
___________________________________________________________
Happy Trading!
Remember the CPTI credo: May our remote batteries and self-
discipline last forever, but mierde happens. Be prepared! In
trading, as in life, it’s not the cards we’re dealt. It’s how we
play them. Your questions and comments are always welcome.
Mike Parnos
CPTI Master Strategist and HCP
------------------------------------------------------------
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